Ramsey, Officially, no. Realistically, yes. It is easy to understand. Those who generate the most commissions have to be treated the best, as they are also being wooed by other firms. When I managed $10 billion, I was wined and dined several times a month and it would have been more if I hadn't been jealous of my free time. I got gifts on my birthday and at Xmas. I had a lot of trouble with the $50 limit my firms put on gifts from brokers.
Now that I manage my own money (I get no benefit from the partnership as the principals are brokerage employees and all trades have to go through their firm), a somewhat smaller sum, I get a Xmas card now and then. <g>
The top customers not only get the hot IPOs, the more business they do, the more shares they get. Many of the fund families used to have what is known as a "slush" fund. It was usually small and new. So, if a $50 billion co. gets 1000 shares of an IPO that goes up 400% on the offering day, that means nothing to the $2 billion growth fund. It means a lot to the performance of the $5 billion slush fund. That fund has hot performance, suckers buy, it gets big, and the family creates another slush fund. The suckers who bought that performance wonder why it isn't doing as well this year. <g> Also, the big customer can specify he wants the last however many shares. This way, if it is a drag on the market, and the broker is stuck with shares, the big customer doesn't play.
Another benefit larger customers have is that they set the commission rate. Supposedly, rates are negotiated. Realistically, you and I take what is offered and if we don't like it, we seek a better offer. We don't really sit down with Mr. Quick and tell him that his rates should be as low as Ameritrade's. When I managed money, I told the brokers what they could take in commission after each trade. Again, there was no negotiation. Take it or pull the key. However, I was known as commission generous. I wanted large firms to risk their capital to position my trades, and they do that for firms that pay good commissions. There is no reason to get for those who are really cutrate. Whenever my directors asked about my rates, I pointed out the number of firms that went out of the business thanks to trading with us. <g> It is much better to get a sixteenth on a $500 million bond trade than to pay a penny less on an options commission.
I never dialled a broker in my life. I had a big keyboard with direct keys. These things lit up and flashed "American Capital" or "St. Paul" at the brokerage firms and they hopped to answer it. For some, this wasn't a big deal. With them, I was basically their only client. But, for others, they would hang up on less important clients immediately to take my call. No broker wanted to hear, "he was holding for a while, but then he said he would do the trade with Goldman." <G>
It isn't just priority execution. Big players play in size the markets cannot handle. You simply do not walk over to the specialist with an order to buy or sell 400,000 shares. The brokerage firm often ended up taking the other side of my trades, or at least a good portion of them. They don't do that for retail clients. A large customer needs liquidity and price. He doesn't want to hear, "we sold 10 of those options you wanted to sell at a better price than your limit," when he wanted to sell 1000 of them.
I have no idea how or even if discounters get IPOs. I assume they don't get the hot ones. |
